How COVID-19 reshaped M&A agreements

 How COVID-19 reshaped M&A agreements

 How COVID-19 reshaped M&A agreements


Nearly a year after the covid-19 pandemic spread, it is clear that even M&Amp;A agreements are not immune to the new disease, as dealmakers negotiate more negative material effects identified items and often tend to use the gains as part of the deal's consideration.


The World Health Organization (WHO) described the coronavirus outbreak as a global health emergency on January 30, 2020, and on March 11, it declared it a global epidemic. The virus spread across the United States early last year and caused the closure of major cities, and the pace of mergers and acquisitions stalled as companies tried to figure out how they could even remain open, let alone complete the merger.


By the second half of 2020, activity was booming, and M&Amp;A lawyers were asked to enter into contracts in a language that would protect against unexpected disasters such as the Coronavirus. Changes in merger agreements are accurate but important, affecting everything from the terms of the reverse material effect to the form of consideration of the transaction and how long it may take to close the transaction.


Among the key areas of deal agreements affected by the epidemic are the physical negative effects and terms of material reverse change, or mae and MACs terms, terms often used interchangeably. In the wake of the COVID-19 outbreak, there have been notable cases where one of the parties to the deal tried to exit the deal by citing mae or MAC.


One notable example is the disagreement between jewellers Tiffany & Co. and LVMH Moet Hennessy Louis Vuitton SA. LVMH agreed to buy Tiffany for $16.2 billion in November 2019, but amid the epidemic it said it would not be able to execute the deal. Tiffany sued LVMH in delaware chanseri court, accusing her of illegally using the epidemic to try to avoid completing the deal.


LVMH filed a competing lawsuit in Belgium, and one of the issues at stake was whether the economic effects of the epidemic on Tiffany's business constitute mae. Finally, in October 2020, the two companies announced the settlement of their dispute and agreed to a revised $15.8 billion merger.


Even before the epidemic began, MAE items were becoming more determined to supply both parties in a deal with greater certainty, and this trend towards increased privacy was only reinforced by the epidemic. Basically, each M&As agreement at present specifically refers to COVID-19, so it is necessary to be clear as to whether something has been truncated from MAE as an exception, or whether covid-19 effects specifically have been truncated from MAE.


If the contract is written to specifically explain that covid-19 effects are derived from MAE, it means that even if the epidemic has a tremendous impact on business, the parties have decided that these negative effects cannot be so. He was cited as the reason for one of the parties' exit from the deal, according to O'Brien.


"In the past, contracts may or may not explicitly refer to a "pandemic," and they may or may not have other exceptions, including the effects of the epidemic, he said. "Now, they are likely to say "COVID-19" or "pandemic" directly."


Furthermore, O'Brien said that although more agreements contain provisions specifically referring to COVID-19, the parties to the transactions do not always agree on those parts of the contract.


He said: "On the other hand, the use of this language there is convenient for sellers because it reduces the potential size of MAE." "But on the other hand, you see that some deals have not been completed just because the parties cannot agree on the language contained in the MAE clause."


If your head isn't already spinning, there's more to discuss ing MAE. In some cases, terms that have been truncated from the MAE clause are reassigned to determine that it is reliable out of a deal, but only if the effects on the business are disproportionate compared to peers.


O'Bryan said: "In every definition of MAE, you'll see some sculptures carved again."


Once you reach an understanding on what is carved back, there is still more to consider.


"You have to think about how you're going to write the paragraph," he said. "You can spend a lot of time talking about who exactly forms the peer, for example. There are no identical companies, so peer definition is under discussion."


Before entering into a discussion on all these details, lawyers should help negotiate whether terms such as "COVID-19" or "pandemic" can be included in the judgment, where the position on the matter can vary depending on the client.


Rahul Patel, partner at King & Spalding LLP and co-chairman of the company's global private equity firm, said: "Most sellers say, 'Look, if anything is related to the epidemic, it can't be considered MAE'. And the practice of mergers and acquisitions. "Buyers say this is generally good, but if the work is disproportionately negatively affected compared to others in the same industry, it should be calculated."


According to Patel, it is common at this stage for M&Amp;A agreements to include some sort of specific reference to the COVID-19 pandemic rather than keeping companies silent on the issue, even if the terms of each MAE and MAC contract are unique.


"To the extent that there were changes in merger agreements, it was about the specific effects of COVID," Patel said. "Usually don't keep quiet about it. Buyers and sellers tend to be very clear in the contract: either the effects of the epidemic can be considered or should not be considered for the purposes of determining whether there is mae or not."


Other provisions have also been affected by the epidemic, such as the covenant to work in the normal business context. These pledges stipulate that any party to the transaction must continue to run its business in the normal course or risk giving its counterpart a chance to exit. These covenants were heavily loomed in the heads of clients, where, for example,


Even if the retailer adapts quickly to doing business online, if it has previously entered into an Merger and Acquisition Agreement with a strict commitment to operate in the normal business context, the other side of the transaction will be able to say that the retailer no longer operates like the same company as it used to be.


According to morrison & Foerster's warning of January 15, since the epidemic, sellers have sought flexibility to take "potentially dramatic steps regarding their business, while buyers have continued to limit the changes that a target can make and still require a buyer to close."


The other affected area is the schedules for regulatory approvals and termination dates. Today's deals often have a longer external closing date than usual, partly because many regulators still operate remotely and with fewer employees.


Morrison & Foerster's client alert said that this led to longer periods of time, and "parties responded by agreeing to longer external dates and, in some cases, automatic extensions if the party involved was using specific efforts."


The need for longer schedules stems from two key factors: first, there is an increase in trades announced at the end of last year, resulting in a large number of regulatory requests, so there are a lot of deals to be reviewed. Second, the Biden administration has been in power for less than two months, so it may take some time to figure out how to deal with some issues.


"So far, things have mostly been logistical," O'Brien said.


Then there is an increase in the use of gains, among other creative features, such as considering the deal. Historically, profits have been most common in sectors such as life sciences, technology and industry, and deferred payment is often used as a way to ensure that some key employees stay for some time rather than spend their money and leave the company once they are acquired.


Because of the Coronavirus, gains have become more common as a way to reduce the risk of the downside of the deal, according to Chris Letang, managing director of the Professional Services Team at SRS Acquiom, which provides programs designed to help deal parties manage mergers and acquisitions. .


"We have certainly seen an increase in gains during the epidemic," Letang said. "The way we were thinking is this: profits are the thing that deal parties use when they are unable to reach terms on what the agreement should be."